Real estate investment trusts (REITs) are investment vehicles that own and manage income-producing real estate assets. REITs allow individual investors to invest in large-scale commercial properties that would otherwise be inaccessible. However, there are regulations on what assets REITs can invest in. This article explores the main purposes of REITs investing in partnerships, as well as the regulation limits.
Tax benefits is the main purpose for REITs to invest in partnerships
REITs invest in partnerships to gain tax benefits, as partnerships allow income and losses to pass through to partners for tax purposes. This avoids double taxation at the corporate level. However, REITs cannot invest in limited partnerships according to IRS rules. They can invest in general partnerships where they have control and decision making authority.
IRS regulations prohibit REITs from investing in limited partnerships
According to IRS regulations, a REIT that invests in a limited partnership risks losing its tax-advantaged status. This is because limited partners lack control and decision making authority, which goes against the IRS requirements for REITs. So while investing in partnerships can provide tax benefits, REITs need to be mindful of losing their special tax status under the regulations.
Investing in limited partnerships also reduces liquidity for REITs
On top of regulatory limits, investing in limited partnerships can reduce liquidity for REITs. Limited partnership interests are generally illiquid as there are restrictions on selling or transferring such interests. This conflicts with REIT requirements to distribute 90% of taxable income annually to shareholders, which necessitates maintaining liquidity of assets.
Non-listed REITs have more flexibility to invest in partnerships
Although listed REITs have tight regulations on investing in limited partnerships, non-listed private REITs generally have more flexibility. Non-listed REITs are not subject to the same stringent standards and oversight as publicly listed REITs. So they can take on more risky, less liquid investment strategies like limited partnerships while still enjoying REIT tax status.
In summary, the main benefit for REITs investing in partnerships is gaining tax advantages. However, IRS regulations prohibit REITs from investing in limited partnerships specifically, as that would risk their special tax status. Investing in limited partnerships also reduces liquidity for REITs. Non-listed private REITs have more leeway than publicly traded REITs in investing in partnerships due to less oversight.